United Petroleum Pty Limited v Roads and Maritime Services

[2018] NSWLEC 35

Land and Environment Court

New South Wales

Medium Neutral Citation:	United Petroleum Pty Limited v Roads and Maritime Services [2018] NSWLEC 35
Hearing dates:	25, 26, 29 and 30 May, 1 and 2 June 2017
Date of orders:	23 March 2018
Decision date:	23 March 2018
Jurisdiction:	Class 3
Before:	Robson J
Decision:	See findings at [327]-[330], directions at [331]
Catchwords:	COMPULSORY ACQUISITION – valuation of leasehold interest – disturbance – where compensation already paid for land value – whether separate compensation can be paid – whether weak tenancy is a relevant consideration for valuation of disturbance – circumstances in which legal costs and valuation fees are recoverable as disturbance – circumstances in which rent can be claimed as disturbance – methodology for assessing quantum of disturbance – capitalisation of loss of profits – calculation of discount rate – circumstances in which relocation is reasonable – whether lost profits costs reasonably incurred
Legislation Cited:	Conveyancing Act 1919 (NSW) s 127 Land Acquisition (Just Terms Compensation) Act 1991 (NSW) ss 34, 42, 44, 54, 55, 56, 59, 66 Land and Environment Court Act 1979 (NSW) s 37
Cases Cited:	Attard v Transport for NSW [2014] NSWLEC 44; (2014) 205 LGERA 396 Brock v Roads and Maritime Services [2012] NSWCA 404; (2012) 191 LGERA 267 Caruana v Port Macquarie-Hastings Council [2007] NSWLEC 109; (2007) 210 LGERA 1 Constantine v Blacktown City Council (No 2) [2016] NSWLEC 81 Director of Buildings & Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111 El Boustani v Minister administering the Environmental Planning and Assessment Act 1979 [2014] NSWCA 33; (2014) 199 LGERA 198 Elmon Pty Ltd and Lastep Pty Ltd v Roads and Maritime Services [2016] NSWLEC 168 George D Angus Pty Limited v Health Administration Corporation [2013] NSWLEC 212; (2013) 205 LGERA 357 Hoy v Coffs Harbour City Council [2016] NSWCA 257; (2016) 281 LGERA 411 Konduru T/as Warringah Road Family Medical Centre v Roads and Maritime Services; Konduru v Roads and Maritime Services; Konduru v Roads and Maritime Services [2017] NSWLEC 36; (2017) 224 LGERA 262 Macarbell Pty Limited v RTA, Nasser v RTA [2006] NSWLEC 651; (2006) 149 LGERA 217 Marshall v Director-General, Department of Transport (2001) 205 CLR 603; [2001] HCA 37 Roads and Traffic Authority of NSW v McDonald [2010] NSWCA 236; (2010) 175 LGERA 276 Roads and Traffic Authority of New South Wales v Peak [2007] NSWCA 66 SNS Pty Ltd v Roads and Maritime Services [2018] NSWLEC 7 Stephen Anthony Horton and Kay Elizabeth Horton v Wyong Shire Council (No.2) [2005] NSWLEC 45 Taylor v Roads and Maritime Services [2016] NSWLEC 138 The Minister v NSW Aerated Water & Confectionery Co Ltd (1916) 22 CLR 56; [1916] HCA 48 Tolson v Roads and Maritime Services [2014] NSWCA 161; (2014) 201 LGERA 367
Texts Cited:	Australian Accountancy Standard AASB 13
Category:	Principal judgment
Parties:	United Petroleum Pty Limited (Applicant) Roads and Maritime Services (Respondent)
Representation:	Counsel: I J Hemmings SC with J McKelvey (Applicant) M J Astill (Respondent)   Solicitors: Thomson Geer (Applicant) Corrs Chambers Westgarth (Respondent)
File Number(s):	2016/00160710

Judgment

Introduction

1. On 28 August 2015, Roads and Maritime Services (‘RMS’) compulsorily acquired the land and improvements comprising Lots 1 and 2 in Deposited Plan 517094 and Lot 1 in Deposited Plan 527320 known as 4928 Pacific Highway, Harwood (‘Land’) for road works associated with the Pacific Highway Upgrade, Woolgoolga to Ballina Project. The Land was owned by Lastep Pty Limited (‘Lastep’) and Elmon Pty Limited (‘Elmon’).

2. The applicant, United Petroleum Pty Limited (‘United’), occupied the Land as tenant pursuant to an informal oral lease from Lastep and Elmon, upon which it operated a service station and restaurant business known as the Harwood Roadhouse. United objects to the amount of compensation offered by RMS for the acquisition of its interest in the Land, being the sum of $139,319, and brings these proceedings pursuant to s 66 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (‘Just Terms Act’).

3. In addition to relatively minor claims for legal costs, valuation fees, and rent paid to RMS for a period after the acquisition, United claims compensation for loss attributable to disturbance based upon either the anticipated costs of relocation of the service station (and United’s associated short term loss of profits) or, if the service station cannot be relocated, for the permanent loss of profits suffered by United from its inability to conduct its business on the Land.

4. RMS primarily contends that no compensation is payable because compensation for both the Land and the operation of the Harwood Roadhouse was accounted for in the determination of compensation already paid to Lastep and Elmon. RMS further contends that because there is nowhere to relocate United’s business, the costs of relocation are not likely to be incurred. RMS also contends that the costs claimable under the Just Terms Act are limited to costs that might reasonably be incurred relating to United’s actual use of the Land, which RMS characterises as being simply the occupation of a service station, and, as such, United’s relocation claims in relation to planning, rezoning, and building a new service station are outside the scope of the Just Terms Act. In any case, RMS submits that any costs that United would incur in relocating would relate to relatively minor matters such as “rebadging” and the like.

5. In the hearing of these proceedings, I have been assisted by Acting Commissioner Parker under s 37(1) of the Land and Environment Court Act 1979 (NSW) (‘LEC Act’).

Background

The Land

6. The Land has an area of 8,436m². At 28 August 2015 (‘acquisition date’), the improvements on the Land comprised a service station (including underground petroleum storage tanks, an LPG storage tank and associated lines), a café/shop, a toilet block, a dwelling house, a shed, and a bitumen hardstand area. RMS was given vacant possession on 7 April 2016 (‘date of vacant possession’). Between the acquisition date and 7 April 2016, United continued to occupy the Land and paid rent to RMS in the sum of $129,340.

Various interests in the Land

United

7. United is a privately owned company incorporated in 1999. United is the trustee for the United Petroleum Unit Trust which has two primary beneficiaries being related entities of its two founding directors, Avi Silver and Eddie Hirsch. It operates a “high turnover fuel retailing business” through a large retail network of service stations (referred to for convenience as ‘United Group’). At the acquisition date, the Harwood Roadhouse was one of over 300 United service stations across Australia. These service stations have an annual turnover of over a billion dollars. Over a number of years, United has adopted a business practice whereby it operates its fuel retailing operations on premises, primarily service stations and convenience store sites, which it leases from various land holding companies (including Lastep and Elmon) which are owned individually by Messrs Silver and Hirsch.

8. In accordance with this business practice, United occupied the Harwood Roadhouse between 7 December 2001 and the acquisition date. Its tenancy was pursuant to an oral lease entered into with Lastep and Elmon. At the acquisition date, United was paying Lastep and Elmon monthly rental in the sum of $6,333.33.

9. From 1 April 2002, United operated the Harwood Roadhouse, including the café/shop, through commission agents, Terrence Cork and Giannina Cork. This arrangement was governed by a Commission Agency Agreement between United and Mr and Mrs Cork for the specific purpose of operating the service station, convenience store, and food outlet on the Land. Mr and Mrs Cork also used the dwelling house on the Land as a private residence. The Commission Agency Agreement could be terminated by United at any time by giving 48 hours’ notice to Mr and Mrs Cork. The operation of the café/shop did not represent a material revenue stream for United as the primary source of income from the site was fuel sales which were approximately $5.3 million in the 2015 financial year.

Lastep and Elmon

10. Prior to acquisition, the Land was owned by Lastep and Elmon which, as above, are special purpose entities incorporated in 1999 to hold land and assets. Lastep and Elmon have no employees and were used by United to acquire the Land and the service station. On 7 December 2001, Lastep and Elmon purchased part of the Land, being Lots 1 and 2 in Deposited Plan 517094 and the Harwood Roadhouse business, later renamed the United Harwood Roadhouse. The remainder of the Land, being Lot 1 in Deposited Plan 527320, was purchased by Lastep and Elmon on 16 January 2003.

11. Relevant to the position of RMS in these proceedings, following the acquisition of the Land on 28 August 2015, the interests of Lastep and Elmon in the Land were valued by the Valuer-General for compensation purposes in the sum of $3,114,540, comprising market value in the sum of $2,950,000 and disturbance in the sum of $164,540, and, in accordance with s 42 of the Just Terms Act, an offer of compensation in that amount was made to Lastep and Elmon by RMS.

12. Although Lastep and Elmon initially refused the offer and commenced Class 3 proceedings in this Court challenging the quantum of compensation, prior to any substantive hearing, Lastep and Elmon, pursuant to s 44(1) of the Just Terms Act, accepted the statutory offer that had been made by RMS. Accordingly, despite some opposition on the part of RMS, in Elmon Pty Ltd and Lastep Pty Ltd v Roads and Maritime Services [2016] NSWLEC 168, Moore J formally entered orders including:

Compensation is determined in the sum of $3,114,540 as assessed by the Valuer-General pursuant to s 55 of the Land Acquisition (Just Terms Compensation) Act 1991…

Overview of competing claims

13. On 19 November 2015, the Valuer-General determined compensation payable to United based solely on disturbance pursuant to s 55(d) of the Just Terms Act in the sum of $139,319. This comprised $129,119 for the extinguishment of United’s business, and legal and valuation fees in the sum of $10,200.

14. United claims compensation for loss attributable to disturbance comprising legal costs pursuant to s 59(1)(a); valuation fees pursuant to s 59(1)(b); and financial costs incurred in connection with relocation pursuant to s 59(1)(c); and, in the alternative to relocation costs pursuant to s 59(1)(c), financial costs relating to the actual use of the Land pursuant to 59(1)(f); as well as repayment of rental paid by United to RMS for occupation of the Land from the acquisition date to the date of vacant possession pursuant to s 59(1)(f). There is also a dispute in relation to the ownership of various assets and whether United is entitled to recover any compensation in that regard.

15. The claims with respect to each of s 59(1)(a) and s 59(1)(b) are relatively straightforward and relate to compensation for legal and valuation fees incurred in connection with the acquisition. The claim in relation to s 59(1)(c) and, alternatively, s 59(1)(f), raises matters of nicety as this claim is based on either the anticipated costs associated with the relocation of the Harwood Roadhouse, including short term loss of profits, or alternatively the permanent loss of profits that United says it would have derived but for the acquisition.

16. As noted above, RMS primarily relies upon the fact that the compensation received by Lastep and Elmon for the acquisition was determined (initially by the Valuer-General and then “determined”, albeit without substantive hearing, in this Court) on the basis that the lease pursuant to which United occupied the site and conducted its business operations could have been terminated at any time (being a statutory tenancy at will). Therefore, RMS submits that the market value component of the compensation paid to Lastep and Elmon comprised the value of both the Land and business thereon as a going concern. RMS contends that the determination of the compensation paid to Lastep and Elmon was consistent with authority that lost future profits from the business being carried out on acquired land are recoverable (and have been recovered) by the owners of the land.

17. In relation to United’s claim for relocation costs (and associated loss of profits) RMS maintains that as no appropriate site is available or has been found, relocation simply cannot be claimed and further, that the costs United would incur in relation to any relocation would be minor.

18. United maintains that the compensation paid to Lastep and Elmon, and the manner of any determination thereof, is irrelevant to its claim for compensation in these proceedings, which is made by a different entity and is based solely upon disturbance and not market value.

19. The parties’ competing positions detailing the amounts derived from the expert evidence are summarised in the table below. In the table, “Relocation Scenario 1” refers to the situation, considered by the expert witnesses, where United would lease a site and build a new service station from which to operate its business; whilst “Relocation Scenario 2” refers to the situation in which United would lease an existing service station requiring only fit-out and rebranding. Both scenarios would involve the physical relocation of the business. United contends that each would likely require it to obtain development consent. In its submissions, United relied primarily upon Relocation Scenario 2.

Head of compensation	United’s position		RMS’s position
Legal costs s 59(1)(a)	$13,206.50 (A)		Nil
Valuation fees s 59(1)(b)	$14,861.21 (B)		Nil
Relocation costs s 59(1)(c)	Relocation Scenario 1 $3,127,033 (C)	Relocation Scenario 2 $1,969,504 (D)	Nil
Other financial costs s 59(1)(f)	Alternative relocation claims if not awarded under s 59(1)(c): Scenario 1 - $3,127,033 (E) Scenario 2 - $1,969,504 (F)		Nil or, in the alternative, $170,306
	Short term loss of profits until relocated: Scenario 1 - $1,252,640 (G) Scenario 2 - $1,227,720 (H)		Nil
	Permanent loss of profits if not relocated: $2,923,529 (I)		Nil or, in the alternative, $165,000
	Rental: $129,340 (J)		Nil
TOTAL	Relocation Scenario 1 - $4,537,080.71 (A + B + C or E + G + J)		Nil
	Relocation Scenario 2 - $3,354,631.71 (A + B + D or F + H + J)		Nil
	Permanent Lost Profits - $3,080,936.71 (A + B + I + J)		Nil or, in the alternative, either $165,000 or $170,306

20. Briefly stated, apart from the claims for legal costs and valuation fees, United contends, assuming the Court accepts that relocation is possible, that the Court would accept United would be likely to incur costs of $3,127,033 in planning, development and construction costs to achieve relocation in Scenario 1 and, in the alternative, it would be likely to incur costs of $1,969,504 planning, development and fit-out costs to achieve relocation in Scenario 2. United contends that the physical relocation costs involved in either scenario are financial costs that would be “reasonably incurred in connection with the relocation…” in accordance with s 59(1)(c) and, in the alternative, “reasonably incurred (or that might be reasonably incurred), relating to the actual use of the land, as a direct and natural consequence of the acquisition” such that it is entitled to those costs under s 59(1)(f) of the Just Terms Act.

21. In relation to each relocation claim, a claim under s 59(1)(f) is also made for the loss of profits which United contends it will not receive unless, or until, the service station is relocated. United contends that such a loss of profit is calculated by determining the expected profit United would have received from the Harwood Roadhouse and adjusting the quantum to take into account the time value of money and the risks of achieving the expected profit.

22. If the Court finds that the service station business cannot be relocated, United contends that the profit contribution made by the Harwood Roadhouse business will be lost to it forever and claims, in the alternative to Relocation Scenarios 1 and 2 (and the claim for interim loss of profits), permanent loss of profits in the sum of $2,923,529.

23. Finally, as a discrete claim pursuant to s 59(1)(f), United claims the rent it paid to RMS between the acquisition date and the date of vacant possession, being the sum of $129,340 (‘rental claim’).

24. The competing contentions require, first, the determination of whether United is entitled to compensation as claimed, and if so, whether each claim fits within the statutory heads in s 59(1); and, second, the correct manner of calculating any such loss. I will make a determination with respect to these matters, then direct the parties to file agreed schedules with the Court reflecting my findings. I will then make final orders determining United’s claim for compensation.

25. In determining United’s claims, one of the issues requiring determination is the correct approach to be applied when an insecure tenant claims, among other things, lost profit from the same business that RMS contends was taken into account in the determination of the compensation paid to the Land owners. In doing so, RMS submits the insecure tenant relies upon the relationship (being the insecure tenancy) that was required to be put aside when determining the owners’ compensation so as to show that the tenant (United) would have been allowed to remain in occupation indefinitely notwithstanding the insecurity of the tenure.

26. Prior to considering the evidence and the position of the parties in more detail, it is relevant to note that RMS does not deny that United had a relevant interest in the Land within the meaning of the Just Terms Act, in that as at the acquisition date it enjoyed at least a statutory tenancy at will pursuant to s 127 of the Conveyancing Act 1919 (NSW).

The statutory scheme

27. The amount of compensation to which a claimant who has an interest in land that has been divested, extinguished or diminished by an acquisition is entitled is determined pursuant to Div 4, Pt 3 of the Just Terms Act. The matters that are to be taken into account in determining compensation are exhaustively set out in s 55, which provides:

55 Relevant matters to be considered in determining amount of compensation

In determining the amount of compensation to which a person is entitled, regard must be had to the following matters only (as assessed in accordance with this Division):

(a)   the market value of the land on the date of its acquisition,

(b)   any special value of the land to the person on the date of its acquisition,

(c)   any loss attributable to severance,

(d)   any loss attributable to disturbance,

(e)   the disadvantage resulting from relocation,

(f)    any increase or decrease in the value of any other land of the person at the date of acquisition which adjoins or is severed from the acquired land by reason of the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired.

28. Also relevant are ss 54, 56 and 59 of the Just Terms Act, which provide:

54 Entitlement to just compensation

(1)   The amount of compensation to which a person is entitled under this Part is such amount as, having regard to all relevant matters under this Part, will justly compensate the person for the acquisition of the land.

(2)   If the compensation that is payable under this Part to a person from whom native title rights and interests in relation to land have been acquired does not amount to compensation on just terms within the meaning of the Commonwealth Native Title Act, the person concerned is entitled to such additional compensation as is necessary to ensure that the compensation is paid on that basis.

56 Market value

(1) In this Act:

market value of land at any time means the amount that would have been paid for the land if it had been sold at that time by a willing but not anxious seller to a willing but not anxious buyer, disregarding (for the purpose of determining the amount that would have been paid):

(a)   any increase or decrease in the value of the land caused by the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired, and

(b)   any increase in the value of the land caused by the carrying out by the authority of the State, before the land is acquired, of improvements for the public purpose for which the land is to be acquired, and

(c)   any increase in the value of the land caused by its use in a manner or for a purpose contrary to law.

(2)   When assessing the market value of land for the purpose of paying compensation to a number of former owners of the land, the sum of the market values of each interest in the land must not (except with the approval of the Minister responsible for the authority of the State) exceed the market value of the land at the date of acquisition.

(3) If:

(a)   the land is used for a particular purpose and there is no general market for land used for that purpose, and

(b)   the owner genuinely proposes to continue after the acquisition to use other land for that purpose,

the market value of the land is taken, for the purpose of paying compensation, to be the reasonable cost to the owner of equivalent reinstatement in some other location. That cost is to be reduced by any costs for which compensation is payable for loss attributable to disturbance and by any likely improvement in the owner’s financial position because of the relocation.

59 Loss attributable to disturbance

(1)   In this Act:

loss attributable to disturbance of land means any of the following:

(a)   legal costs reasonably incurred by the persons entitled to compensation in connection with the compulsory acquisition of the land,

(b)   valuation fees of a qualified valuer reasonably incurred by those persons in connection with the compulsory acquisition of the land (but not fees calculated by reference to the value, as assessed by the valuer, of the land),

(c)   financial costs reasonably incurred in connection with the relocation of those persons (including legal costs but not including stamp duty or mortgage costs),

(d)   stamp duty costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the purchase of land for relocation (but not exceeding the amount that would be incurred for the purchase of land of equivalent value to the land compulsorily acquired),

(e)   financial costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the discharge of a mortgage and the execution of a new mortgage resulting from the relocation (but not exceeding the amount that would be incurred if the new mortgage secured the repayment of the balance owing in respect of the discharged mortgage),

(f)    any other financial costs reasonably incurred (or that might reasonably be incurred), relating to the actual use of the land, as a direct and natural consequence of the acquisition.

(2)   Subject to the regulations, a reference in this section to a qualified valuer is a reference to a person who:

(a)   has membership of the Australian Valuers Institute (other than associate or student membership), or

(b)   has membership of the Australian Property Institute (other than student or provisional membership), acquired in connection with his or her occupation as a valuer, or

(c)   has membership of the Royal Institution of Chartered Surveyors as a chartered valuer, or

(d)   is of a class prescribed by the regulations.

Evidence

29. Given that United bases its claim upon the costs of relocation and loss of profits (either short term or permanent), it marshalled extensive evidence comprising testimony from a number of employees in relation to its business practices, detailed background documentary material, and expert evidence in the disciplines of town planning, quantity surveying and forensic accounting/business valuation. RMS also marshalled expert evidence in relation to these three disciplines as well as background documentary material relating to its dealings with Lastep and Elmon.

United’s lay evidence

30. United called evidence from Shmuel Carmeli, United’s National Acquisitions Manager; Poh Lee, United’s Head of Cards; David Szymczak, United’s Chief Operating Officer; Ajith Parakrama Abeynaike, United’s Group Financial Controller; Tarun Khanna, United’s Fixed Asset Controller; Sarah-Jane Spry, United’s Legal Assistant; and Samantha Agnes Yeung, solicitor. The evidence was largely uncontested, apart from RMS’s concerns regarding the ownership of assets at Harwood Roadhouse. In addition to the background facts set out above, it may be summarised as follows:

1. United’s fuel retailing business, which commenced in 1993, involved it leasing service stations and convenience store sites from companies owned equally by United’s two founding directors, Avi Silver and Eddie Hirsch. Lastep and Elmon are two of approximately 298 similar “land holding” companies owned by Messrs Silver and Hirsch which have acquired petrol station sites across Australia for the specific purpose of leasing them to United’s fuel retailing business.

2. United’s usual practice, and that adopted in relation to the Harwood Roadhouse, was that two corporate entities owned by Messrs Silver and Hirsch respectively would purchase the real property and that United would purchase the business thereon including all plant and equipment. The arrangement was that if equipment had been purchased by the entities as part of the property purchase, it would be transferred to United. This practice applied across the whole of United’s operations such that United remained responsible for structural repairs and maintenance of tanks, lines and equipment. Relevantly, at least according to United, the plant and equipment at the Harwood site, including the tanks and lines, were owned by United which was responsible for the maintenance and upkeep of the service station, tanks, lines, and shop fit-out.

3. United occupied the Land as tenant pursuant to an oral lease from the registered proprietors, Lastep and Elmon. As at the acquisition date, United was paying Lastep and Elmon rental in the sum of $76,000 per year for the Harwood site. This amount was below the market rate. After acquisition, United continued to operate its business on the site up until the date of vacant possession and paid rent to RMS pursuant to s 34 of the Just Terms Act at a daily rate of $580 ($213,000 per year). This equated to a total amount of $129,340.

4. At the acquisition date, United’s national service station network comprised 362 United branded and operated retail sites. Of these, 30 were located within 200km of the Land, including 8 within 100km and 16 within 150km. United’s fuel retailing business is focused on sub-metropolitan and regional markets with regional sites located on major highways near townships.

31. Mr Carmeli deposed that he is a qualified valuer and specialises in valuation of petrol stations. In addition to some of the background facts above, Mr Carmeli gave evidence as follows:

1. He is responsible for sourcing new fuel retailing opportunities across Australia and developing the sites. In his experience, there are three kinds of property acquisition undertaken by United: first, the acquisition of an existing service station which can be rebranded; second, the acquisition of a greenfield site where a service station is permitted with development consent; and third, the acquisition of a greenfield site where a service station is not permitted. In relation to relocating the Harwood site, Mr Carmeli deposed that an existing service station site would be the preferred option, being the most efficient both with respect to time and cost.

2. United’s service stations are focused on sub-metropolitan and regional markets.

3. The site at Harwood benefits from frontage to the Pacific Highway and services a number of surrounding towns. United has service stations located at 50km south-west of the site at South Grafton, and 80km north of the site at Lismore. In order to “fill the gap” caused by the acquisition, United would need to relocate the Harwood site to a new site within the Harwood site’s locality. An “alternative comparable site” to the Harwood site ideally would be located with direct access to the Pacific Highway, be supported by a cluster of townships, be a site not likely to be acquired or bypassed in the future, have a road frontage of 75 to 100 metres, have an area of 6,000 to 10,000 square metres, and be located in a zone where service stations are permitted with development consent (or benefit from existing use rights).

4. The matters he would consider in identifying and acquiring a potential new site include various studies and web-based tools which provide demographic, government and industry data viewed through a mapping platform, as well as searching the available property market for appropriate listings. He would thereafter conduct a title search and approach the land owner.

5. United’s sourcing of a new fuel retailing opportunity would include the following steps: searching, considering design, procuring a costs estimate, considering feasibility, making an offer and conducting negotiations, making formal agreements for lease or sale, preparing the design and development application and completing an environmental assessment of the site.

6. In relation to attempts to relocate the Harwood Roadhouse business, United had identified a number of sites (including, in December 2014, a site at Mororo in New South Wales; and, in January 2016, a site at Halfway Creek and at Tyndale) which were not “pursued” for various reasons including purchase price, proximity to competing businesses, distance from townships where United had service stations and the likelihood of the site being bypassed in the near future. One of the reasons for the Mororo site not being pursued was that United did not want to commit to acquiring or leasing until compensation for the Harwood Roadhouse acquisition had been determined.

7. At the date of hearing, notwithstanding that a new site had not been identified to replace the Harwood site, it was United’s intention to continue its search. Mr Carmeli opined that there “are opportunities between Coffs Harbour and Tweed Heads”. According to Mr Carmeli, it is simply a matter of those sites becoming available and being commercially appropriate for the business model of United.

8. Around the acquisition date, United salvaged some items for potential use at an alternative property once a suitable replacement property was identified and secured. Some items were left behind because of United’s view that they either could not be used elsewhere or could not be removed in the timeframe available. Mr Carmeli produced an “asset register” of items left on the site and an “asset register” of items removed.

9. At the acquisition date, leases between United and the land holding companies owned by Messrs Silver and Hirsch were in the process of being formalised in preparation for United to be listed on the Australian Securities Exchange and, but for the acquisition of the Land by RMS, the oral lease between Lastep and Elmon and United would have been formalised. The formalised leases which have been entered into by United and related landlord entities after 2015 have been for a term of between 15 and 20 years, with options to renew for five year periods, giving a total lease term of between 35 and 45 years.

10. Mr Carmeli deposed that all items listed on the asset registers for the Harwood site were owned by United and that the practice of United is for United to purchase the land and equipment at a particular site, whilst two land holding companies purchase the land itself. In the case of the Harwood site, Mr Carmeli acknowledged that both the Land and assets were originally owned by Lastep and Elmon, but stated that the assets were subsequently transferred to United, as per the asset registers.

Town planning evidence

32. Town planning evidence was given by David Haskew for United and Anthony Rowan for RMS. Each of the town planners prepared an individual report responding to different instructions relating to United’s relocation claims and thereafter met and prepared a joint planning report. The town planning evidence may be summarised as follows:

1. Mr Haskew was instructed to consider the planning and development process, and likely costs and timing thereof, which would need to be undertaken by United in relocating the Harwood service station to another unidentified site in four factual scenarios, being: first, the occupation and rebranding of an existing service station with the use of existing underground fuel tanks; second, the occupation of an existing service station requiring replacement of underground fuel tanks; third, the construction of a new service station on a site where the current zoning permits such development; and fourth, the construction of a new service station on a site where the current zoning would need to be changed. His report contained his estimates of the costs and timing for the preparation, lodgement, and consideration of a development application in relation to each scenario. Given the varying work that would be entailed in each scenario, his costs estimates ranged from approximately $49,000 for the first scenario up to approximately $168,000 for the fourth scenario. He estimated that the total time frame to prepare a development application and procure approval for a new service station or a “refit” of an existing one would be 7 to 12 months. For the rebranding scenario, which United ultimately submitted was “reasonable”, adopting a “weighted average” approach, he estimated the likely cost would be $64,014.

2. Mr Rowan was instructed to provide an opinion in relation to four tasks: first, to opine as to the highest and best town planning use of the Land; second, to identify any planning matters he considered relevant; third, to identify any land within a 20km radius of the Land on which the use of a service station or highway service centre is permissible; and fourth, to consider various matters raised in an earlier planning report prepared on behalf of United. He opined that there is no land suitable within a 20km radius of the Land.

3. The joint report and the oral evidence primarily considered the various relocation scenarios prepared by Mr Haskew. The principal area of disagreement was that Mr Rowan considered Mr Haskew’s approach flawed in two respects: first, the scenarios considered were general and did not relate to any specific location proximate or comparable to the Land and, second, the scenarios assumed a need to upgrade, improve and redevelop in order to enable relocation of the current uses without specifying any particular scope of work or operation. Thus, Mr Rowan did not consider the scenarios to be useful in determining the likely cost and timing of potential development applications as they were too broad.

Quantity surveying evidence

33. Quantity surveying and cost assessment evidence in relation to any possible relocation was given by Jonathan Marriott for United and David Lawson for RMS. Each of the quantity surveyors prepared an individual report and thereafter prepared a joint report.

34. Mr Marriott undertook three costs assessments, being:

1. the present day as new cost of the assets he was instructed were installed and owned by United at the Harwood site at the acquisition date (‘subject property asset cost’), which he initially based upon the original fit-out works undertaken by United to upgrade the Harwood Roadhouse into a functioning service centre some years earlier, assessed at $474,293.31, and later, based on an updated “asset register”, at $292,983.79 (plus 20% contingency);

2. the present day cost estimate for constructing a comparable service station on a greenfield site (excluding associated development application fees) (‘relocation alternative’), which he assessed at $3,072,628 (excluding GST); and

3. the present day cost estimate for “rebranding” a comparable existing service station to a United service station (which Mr Marriott was instructed involved a scope of works with 12 specific works, including replacement of some items such as tanks, bowsers, fuel lines, pumps, hardstand and cool room) (‘rebranding alternative’), which he assessed at $2,163,395 (excluding GST).

35. In response, Mr Lawson, with considerable reservations as to the lack of information and the inability to inspect the site, addressed Mr Marriott’s three assessments as follows:

1. whilst noting that “it is impossible to determine the extent or value of assets”, Mr Lawson assessed the “subject property asset cost” by considering the asset register which was provided to, and assessed at a value of $474,293.31 by, Mr Marriott, including adjustments;

2. Mr Lawson assessed a scenario similar to the relocation alternative at $3,550,000 (excluding GST); and

3. Mr Lawson assessed a scenario similar to the rebranding alternative at $2,080,000 (excluding GST).

36. In their joint report, the quantity surveyors estimated the capital costs for works required to address the relocation options detailed in the town planning joint report (excluding costs associated with design and submitting a development application and associated costs) and made adjustments to their assessments to be on a “like for like” basis and concluded as follows:

Alternative	Mr Marriott	Mr Lawson
relocation alternative	$3,053,953	$3,545,335
rebranding alternative	$1,955,490	$2,105,637

37. The joint report did not deal with the assessment of the value of existing assets which had been considered by Mr Marriott in his individual report.

38. As noted above, at hearing Mr Marriott adjusted his earlier estimate to take into account an updated asset register that took into account certain items that had been removed. At the request of the Court, and to address a concern of RMS that not all the twelve specific items of works Mr Marriott had been instructed to include in his assessment were necessary to be undertaken in the rebranding scenario, the quantity surveyors jointly prepared a cost breakdown of each of the 12 specific works that comprised Mr Marriott’s rebranding scenario.

39. The jointly prepared table below details the total cost of these works at approximately $1.383 million.

40. The breakdown provided as follows:

Rebranding	$ Total
1. Re-cladding an existing canopy to “United” colours PLUS new United Corporate signage	143,194
2. Removal of existing fuel delivery infrastructure	136,469
3. Supply and install fuel delivery system including tanks, bowsers, fuel lines and pumps	764,260
4. Survey and clean existing stormwater system	30,326
5. Shop front corporate branding	27,112
6. New hardstand area and new line marking to forecourt area	71,267
7. Replacement of existing floor covering throughout	28,871
8. General refresh of finishes	59,743
9. General refresh of landscaping	7,582
10. Adjustments to existing power, lighting and fire services to suit new fitout and layout	41,699
11. Integration of new cool room	75,816
12. Installation of the United Petroleum direct fitout items (as per the revised asset register tabled)	351,581

41. Included in the list of works (at item 12) is the amount of $351,581, being Mr Marriott’s “subject property asset cost” (noted at [34(1)] above) which was described as the “installation of the United Petroleum direct fit-out items…”

42. In final submissions, considered in further detail below, RMS maintained its position that if the Court accepted the “rebranding alternative” as a basis to determine compensation, the Court would find that only two of the items (being item 1, “Re-cladding an existing canopy to ‘United’ colours plus new United Corporate signage”, and item 5, “Shop front corporate branding”), totalling $170,306, would reasonably be required to be undertaken.

Forensic accounting/business valuation evidence

43. Forensic accounting/business valuation evidence was given by Adam Giliberti for United and Rodney Ferrier for RMS. Each of the accountants prepared an individual report and thereafter prepared a joint report.

44. Mr Giliberti in his primary report assessed United’s claim for disturbance from the viewpoint of the United Group as a whole on four bases, three including hypothetical relocation to various sites. In relation to the relocation options, Mr Giliberti adopted “midpoint” positions of both the town planners (in relation to timing for the re-establishment of the business) and the quantity surveyors (in relation to preliminary and construction costs) to assess the claim for disturbance.

45. In the rebranding option, being the relocation to an existing service station to be rebranded (‘rebranding option’), which was the preferred option in United’s final submissions, Mr Giliberti assessed the costs at $3,896,635 (comprising $2,263,715 relocation construction costs, and $1,528,393 comprising loss of profits for 46.5 months, plus $104,527 interest on loss of profits). In the first relocation option, being relocation to a greenfield site with zoning permission for a service station (‘first relocation option’), Mr Giliberti assessed the costs at $5,057,188 (comprising $3,394,127 construction costs, and $1,556,605 comprising loss of profits for 48 months, plus $106,457 interest on loss of profits). In the second relocation option, being relocation to a greenfield site where zoning permission for a service station would need to be obtained (‘second relocation option’), Mr Giliberti assessed the financial costs at $5,790,582 (comprising $3,467,320 pre-construction and construction costs, and $2,174,544 comprising loss of profits for 74 months, plus $148,718 interest on loss of profits).

46. Apart from the rebranding and relocation options, Mr Giliberti also assessed loss of profits assuming the total and permanent extinguishment of the business activities conducted by United at the Harwood site (‘extinguishment option’). This calculation comprised United’s loss of profits in perpetuity, adopting a capitalised maintainable earnings methodology and adding, in accordance with his instructions, the value of assets said to have been installed at the site as detailed in Mr Marriott’s quantity surveying report (referred to above as “subject property asset cost”) at $4,153,185.

47. Mr Giliberti’s methodology in assessing the extinguishment option included his judgment with respect to the two variables used. First, he opined that the annual loss of profits should be assessed at $584,000. Second, he assessed the appropriate capitalisation rate at 5.9, being 1 divided by the risk adjusted discount rate, which he assessed at 16.96%.

48. Dr Ferrier in his primary report assessed United’s claim for disturbance under four scenarios which can be separated into two distinct categories, being rebranding and extinguishment scenarios. He presented an alternative under each scenario.

49. In Dr Ferrier’s report, the rebranding scenarios assumed that the business could be relocated to a comparable developed service station within the general area. He then calculated compensation as comprising the costs of making good and rebranding the leased service station to which the business is to be relocated, plus the present value of any future loss of profits during and subsequent to the relocation, at either $300,258 if the relocation takes a period of 15 months, or $774,121 if it takes a period of 69 months.

50. In Dr Ferrier’s report, the extinguishment scenarios assumed that the business could not be relocated. In that circumstance, Dr Ferrier assessed the compensation for the extinguishment of the business activities conducted by United at the Harwood site in two ways. First, he determined the price that a purchaser would reasonably have paid to United for that business, being the “fair market value” of the goodwill of the Harwood service station, reduced by an amount recovered from the disposal of assets to a purchaser of the business, which he assessed at $130,000 for the subject property alone. Second, he determined the loss as the reduction in the value of United’s goodwill, based upon a permanent reduction in the profits (and goodwill), which he assessed at $936,000 for the United Group as a whole.

51. The $936,000 figure was calculated by adopting the average earnings before interest and tax, using figures from the three years ending 2015 at the Harwood property, and then adjusting the figure for fair market rent for the Land and what Dr Ferrier termed “profits not lost”. Dr Ferrier then used this average annual earnings figure to capitalise United’s lost profits, using a discount rate which added a further 15% for weak tenure.

52. Relevantly, in his first extinguishment scenario, Dr Ferrier considered the likely effect on “fair market value” of the fact that the business occupied the property on a month to month basis. He opined that a prospective purchaser of the business would consider that there was a significant risk that the business value could be taken by the landowners terminating United’s occupation with one month’s notice. Despite expressing doubt that a purchaser for United’s interest could be found in such circumstances, Dr Ferrier assumed for the purposes of the report that a hypothetical purchaser could be found but that any such purchaser would allow for the “weak tenancy” by way of an adjustment to the capitalisation rate.

53. Thus, reflecting an assumption of one month’s tenure, Dr Ferrier assessed the market value of the goodwill of the Harwood service station at $130,000 (i.e. the “price” referred to above), as follows:

1. assessing maintainable earnings at $253,000;

2. finding a capitalisation rate, having regard to the risk, of 83%. It should be noted that what Dr Ferrier referred to as the capitalisation rate, Mr Giliberti in his report referred to as the “risk adjusted discount rate”. What Mr Giliberti referred to as the capitalisation rate, Dr Ferrier called an “earnings multiple”. Notwithstanding these differences, the methodology adopted was the same. The capitalisation rate gave an earnings multiple of 1.2 (as against Mr Giliberti’s figure of 5.9), which equated to a figure of $304,819. Dr Ferrier rounded this to $305,000;

3. subtracting an allowance for immediate capital expenditure required by the purchaser due to what Dr Ferrier understood was the relatively poor condition of the subject property of $100,000, giving $205,000; and

4. subtracting the written down value of plant and equipment and other tangible assets of $75,914 (as per Mr Carmeli’s evidence), giving a final figure of $128,086. Dr Ferrier explained that the value of a business’ goodwill is calculated by deducting the value of the plant, equipment, and other tangible assets from the total value of the business. Dr Ferrier rounded the final figure to $130,000.

54. In relation to his second extinguishment scenario, that the reduction in the value of the goodwill of the United Petroleum Unit Trust was valued at $936,000, Dr Ferrier opined that it would be financially unreasonable for a business to incur total rebranding costs (including loss of profits) which exceeded the fair value of the goodwill protected by that relocation. It followed that, in Dr Ferrier’s view, it would be unreasonable for the United Group to incur more than $936,000 in total relocation expenses.

55. In the joint report, the experts considered the possible scenarios and approaches which could be reasonably adopted by the Court for the purposes of assessing United’s claim for disturbance and the quantification of loss which would arise from specific scenarios (using the different approaches). Importantly, they agreed that if disturbance under s 59(1)(f) of the Just Terms Act is considered by the Court to reflect a “loss of profits” which has been extinguished from the perspective of the United Group, the correct approach to quantify disturbance is: first, to determine the expected profits which would have been derived had the acquisition not occurred (but will not be derived because of the acquisition); and second, to convert that loss of profits to a present value using a risk-adjusted discount rate which takes into account both the “time value of money” and the risk which would have attached to that loss of profits.

56. There were differences in relation to the calculation of the time value of money. Mr Giliberti opined that if the loss of profits is expressed as a present value at a point in time in the past, that figure should be adjusted for the “time value of money” which is interest accruing from the date which the loss is expressed to the date that compensation is paid. Dr Ferrier did not consider whether interest should be added to any assessment of loss.

57. The experts agreed that if compensation was to be determined by the Court on a relocation basis, the Court may adopt a time frame for relocation that reflects one of the proffered scenarios for the purposes of assessing United’s claim for the lost profits component. This would be assessed at 100% loss of profits for the number of months of no trading (which would depend on which relocation scenario was adopted), plus 25% loss of profits for 12 months following the commencement of trading at the assumed relocated site.

58. The experts also agreed that if disturbance under s 59(1)(f) is held by the Court to consist of the extinguishment of the Harwood Roadhouse as a standalone business, the correct approach to quantify disturbance is to determine the “fair market value” of the goodwill which has been extinguished.

59. Mr Giliberti and Dr Ferrier further agreed that, in relation to the extinguishment claim, if the Court determined that United did not have secure tenure for greater than one month, then a period of one month of 100% loss of profits would apply.

60. The experts failed to agree on the correct approach in relation to determining “goodwill” and “expected profits”. In relation to goodwill, Dr Ferrier favoured an assessment of the “fair market value” of goodwill of the Harwood Roadhouse operation on its own for the purposes of assessing disturbance on a business extinguishment basis whereas Mr Giliberti considered that goodwill is an unidentifiable, intangible asset which cannot be separated from United’s business operations considered as a whole. Therefore, in Mr Giliberti’s view, Dr Ferrier’s determination of a value for goodwill on a “walk-in / walk-out” basis was not an appropriate approach. He gave four reasons: first, the Harwood Roadhouse was not operated by United as a standalone business – it was part of a network of over 300 retail fuel sites operated by United; second, United had no intention to sell the business; third, the value of the business had a greater value to United “in use” than a hypothetical sale as a standalone rural petrol station (because of the ability to realise “cost synergies” achieved from the scale of United’s activities which may not be available to a hypothetical purchaser); and fourth, if every site operated by United was valued on a “walk-in / walk-out” basis, using Dr Ferrier’s approach, it is likely that the sum of the individual parts of the business would most likely be less than the value of the whole of the business.

61. Thus, Mr Giliberti considered that, if the Court found that disturbance should be determined on an “extinguishment” basis, the correct approach would be to determine the “business value” and “goodwill value” in the United Petroleum Unit Trust, that is the whole of United’s business before the acquisition, and then determine any change in the business value in the whole of the business as a direct and natural consequence of the acquisition. Mr Giliberti said this would be a large and complex exercise. As such, Mr Giliberti’s position is that, on the basis that the Court determines relocation is not appropriate, disturbance should be calculated by reference to loss of profits in perpetuity.

62. Dr Ferrier did not agree with Mr Giliberti. He opined that the Harwood Roadhouse could be readily sold as a standalone business and, as a matter of commercial reality, if United decided to sell the Harwood Roadhouse and all the Land on which it operated, it could do so and, as a matter of fact, it is only the Harwood Roadhouse business which is being lost by United. Further, Dr Ferrier was of the view that it is unnecessary to know the value of goodwill attributable to all of United’s other operations in order to assess the decline in United’s goodwill brought about by the extinguishment of the Harwood Roadhouse business.

63. Mr Giliberti noted that if the Court considers extinguishment to be the relevant scenario, United would also claim the value of the tangible assets used at the site to generate profits. In response, Dr Ferrier says that compensation should not include the value of the tangible assets as those tangible assets which had value were in fact retained by United and therefore United has not lost those assets. Further, he says that the assets which were not retained were considered to have no value, therefore cannot result in any additional loss to United in addition to the value of extinguished goodwill. Dr Ferrier has reviewed the assets which were retained by United and adopted a net book value ($29,314) as a reasonable proxy for their net realisable value.

64. With respect to expected profits, Mr Giliberti and Dr Ferrier agreed that before acquisition the average annual contribution profit generated by the Harwood Roadhouse for the United Group was $584,000, and that this should be the “starting point” for the calculation of compensation. Although they agreed that $87,000 should be deducted to reflect costs incurred by the United Group in relation to, but not allocated to, the Harwood Roadhouse accounts, they differed on other adjustments to be made to the average contribution profit generated by the subject property for the United Group.

65. Dr Ferrier suggested the following adjustments be made:

1. an adjustment to reflect the market rent on the basis that the lease would have been formalised and that United would have been paying a fair market rent for the property which is agreed at $213,334 per annum (‘market rent adjustment’); and

2. an adjustment to reflect gross profit which would have been derived from sales at the Harwood Roadhouse which, according to Dr Ferrier, can reasonably be expected not to have been lost by the United Group because those customers would make purchases from other United service stations (‘profit not lost’). Dr Ferrier considered a reasonable assessment of that gross profit not lost would be $68,000 per annum.

66. Mr Giliberti agreed with Dr Ferrier that actual rent paid should be replaced with a market rent for the site if conducting a valuation of the fair market value of a business and its goodwill. Mr Giliberti agreed with the quantum of the market rent adjustment made by Dr Ferrier being a reduction in the reported profit by $137,334. In relation to customers who may attend other United service stations (the nearest located approximately 50km away from Harwood), Mr Giliberti opined that as there are competitor petrol stations located in the Harwood area, the quantum of the adjustment totalling $68,000 (the profit not lost) made by Dr Ferrier was without basis.

67. The experts’ opinions as to the annual and monthly profits lost is set out in the table below:

United Group		Harwood  Roadhouse
Giliberti      $	Ferrier     $	Ferrier        $
Annual contribution	584,000	584,000	497,600
Unallocated costs	-87,000	-87,000
Less depreciation	-31,200
Add actual rent	76,000
Less market rent	-213,334	-213,334
Less: Profit recovered at other locations	-68,000
Annual profit	497,000	291,666	253,066
Rounded to	497,000	292,000	253,000
Monthly	41,417	24,333

68. Concerning the appropriate discount rate, Mr Giliberti and Dr Ferrier agreed that an after tax discount rate of 17% was a reasonable starting point for the United Group, with Dr Ferrier then making an adjustment for tax to derive a discount rate of 24% and, importantly, a further adjustment of 15% for weak tenure. Mr Giliberti did not agree that it was appropriate to make an allowance for weak tenure, as Dr Ferrier had only considered a hypothetical purchaser’s state of mind. In his view, a hypothetical vendor would take steps to ensure security of tenure before sale, and thereby alleviate Dr Ferrier’s concern.

69. The experts reached the following conclusions with respect to the applicable discount rates:

United Group		Harwood Roadhouse
Giliberti	Ferrier	Ferrier
After tax discount rate	17%	17%	23%
Tax adjustment	7%	10%
Pre-tax discount rate	24%	33%
Weak tenure risk premium	15%	50%
Pre-tax discount with weak tenure	39%	83%

70. In the opinion of Dr Ferrier, the Harwood Roadhouse discount rate is the relevant discount rate in the circumstance that the Court determines compensation should properly be measured against the value of the goodwill of the Harwood Roadhouse business as extinguished by the compulsory acquisition.

71. For the reasons outlined above at [60], Mr Giliberti considered valuing the Harwood business as a standalone enterprise to be an inappropriate approach.

72. In his individual report, Dr Ferrier expanded upon the reasons why the weak tenure is less significant for the United Group as a whole. United, being “larger and more diverse” would be subject to less risk than the individual business. Dr Ferrier also took into account the fact that, prior to the compulsory acquisition, United had commenced a process of formalising leases in writing and that therefore some leases would have been secured by August 2015. Taking those factors into account, Dr Ferrier concluded that the weak tenure risk premium should be reduced from 50% for the standalone Harwood business to 15% for United as a whole.

73. Accordingly, as Mr Giliberti and Dr Ferrier differed on profit and discount rate, a wide divergence in their assessments of compensation arose based on loss of profits (excluding relocation costs).

74. Their figures as assessed depending on whether the relevant assessment period is determined to be 1, 46.5, 48 or 74 months, or perpetuity, are as follows:

Loss (excluding interest)
Monthly loss $	Discount rate	As at 7/4/16 (vacant possession) $	As at 28/8/15 (compulsory acquisition) $
46.5 months loss (an existing service station site rebranded)
Giliberti	(post-tax)	41,417	17%	1,227,720		1,213,348
Giliberti	(pre-tax)	41,417	24%	1,126,270		1,108,246
Ferrier	(post-tax)	24,333	17%	721,301		712,857
Ferrier	(pre-tax)	24,333	24%	661,698		651,108
48 months loss (a greenfield site with zoning permission)
Giliberti	(post-tax)	41,417	17%	1,252,640		1,237,977
Giliberti	(pre-tax)	41,417	24%	1,146,942		1,128,586
Ferrier	(post-tax)	24,333	17%	735,942		727,327
Ferrier	(pre-tax)	24,333	24%	673,843		663,059
74 months loss (a greenfield site requiring rezoning)
Giliberti	(post-tax)	41,417	17%	1,798,279		1,777,228
Giliberti	(pre-tax)	41,417	24%	1,572,703		1.547,534
Ferrier	(post-tax)	24,333	17%	1,056,511		1,044,143
Ferrier	(pre-tax)	24,333	24%	923,982		909,195
Loss in perpetuity (assuming no relocation is possible)
Giliberti	(post-tax)	41,417	17%	2,923,529		2,538,284
Giliberti	(pre-tax)	41,417	24%	2,070,833		1,706,340
Ferrier	(post-tax)	24,333	17%	1,617,647		1,404,483
Ferrier	(pre-tax)	24,333	24%	1,116,667		920,119
1 month loss (assuming the Court finds United did not have an interest in land beyond 1 month)
Giliberti	(post-tax)	41,417	n/a	41,417		41,417
Ferrier	(post-tax)	24,333	n/a	24,333		24,333

75. In the circumstance that United’s loss was to be calculated on the basis of the extinguishment or partial extinguishment of goodwill (that is, the value of United’s interest in the Harwood Roadhouse if it were sold), in their joint report, Mr Giliberti and Dr Ferrier reached the following conclusions:

Basis	Mr Giliberti	Dr Ferrier
Harwood Roadhouse goodwill assuming tenure	$2,115,682	$637,000
Harwood Roadhouse goodwill assuming weak tenure	$nil	$165,000
United Petroleum Trust goodwill assuming tenure	$2,115,682	$1,116,667
United Petroleum Trust goodwill assuming weak tenure	$N/A	$648,708

76. The difference between the goodwill assessed from the perspective of the Harwood Roadhouse and United Petroleum Trust in the evidence of Dr Ferrier is a consequence of his opinion that the extinguished business is capable of being assessed as a standalone enterprise.

77. The further differences in the figures stem from the fact that Dr Ferrier considered that the income generated from the Land should be set against the market rent for the property rather than the actual quantum of rent being paid by United to Lastep and Elmon at the acquisition date; that the gross profit should be adjusted having regard to his position concerning the “profit not lost”; and the tangible assets included in Mr Marriott’s schedule should not be included in the value of goodwill in the determination of a quantum for extinguishment (the assets are included in Mr Giliberti’s figures).

78. The experts also differed in their approach to tax. Dr Ferrier adopted a pre-tax discount rate and a pre-tax profit. The pre-tax discount rate was calculated by grossing up the cost of equity by the company tax rate of 30%. This approach was adopted because the cost of equity was derived within the context of the Capital Asset Pricing Model, which is informed by observations of rates of return in the market for listed company shares which are subject to the 30% tax rate.

79. Mr Giliberti calculated the present day value of the future cash flows having regard to the discount rate by reference to three tax scenarios, being:

1. a post-tax, risk-adjusted discount rate (calculated by reference to the cost of equity) applied to the post-tax annuity amounts with a gross-up factor assuming the compensation award is taxable at a 30% tax rate;

2. a post-tax, risk-adjusted discount rate applied to the pre-tax annuity amounts with no gross-up factor assuming the compensation award is taxable at a 30% tax rate; and

3. a pre-tax, risk-adjusted discount rate applied to the pre-tax annuity amounts. This is the approach used by Dr Ferrier. Mr Giliberti noted that this methodology assumes that the sum of compensation is not taxable by the applicant notwithstanding it will be taxable in the hands of the beneficiaries. Further, Mr Giliberti said this approach assumes that the cost of equity can simply be grossed-up at a 30% tax rate despite the fact that different entities will have different effective tax rates. That being the case, in Mr Giliberti’s view, share price or asset data cannot be converted to pre-tax amounts by simply applying a gross-up factor of 30%.

80. Having calculated the annuity in the three ways outlined above, Mr Giliberti observed that scenarios (1) and (2) gave the same result and only Dr Ferrier’s approach, scenario (3), gave a lower sum. Mr Giliberti opined that Dr Ferrier’s approach discounts a claim for loss more heavily on the basis that United, as trustee of the United Petroleum Trust, does not pay tax. In Mr Giliberti’s opinion, this mistakenly ignores that the beneficiaries of the trust are likely to pay tax on the profits distributed and therefore disagrees with Dr Ferrier’s approach.

81. Dr Ferrier argued that his approach is consistent with the approach maintained in the Australian Accountancy Standard AASB 13 “Fair Value Measurement” (‘the accountancy standard’), which relevantly provides that “assumptions about cash flows and discount rates should be internally consistent… after-tax discount flows should be discounted using an after-tax discount rate. Pre-tax cash flows should be discounted at a rate consistent with those cash flows”.

82. Further, Dr Ferrier opined that adopting a pre-tax discount rate and pre-tax profit does not assume the tax status or tax rate of the United Petroleum Trust, but that applying a post-tax discount rate to pre-tax profits, as Mr Giliberti does, assumes not only that United’s income is subject to tax at 30% (as a consequence of using the post-tax discount rate) but that compensation would also be subject to tax at 30% (as a consequence of applying the post-tax discount rate to the pre-tax income). Dr Ferrier submitted that to the extent that any tax will be payable on compensation determined (which is unknowable), it will be paid by the beneficiaries rather than the applicant.

83. Dr Ferrier acknowledged that tax scenarios (1) and (2) considered by Mr Giliberti produce the same result. However, Dr Ferrier opined that neither approach is reasonable in the circumstances. In his view, such an approach would only be appropriate in circumstances in which United:

1. would have been liable for income tax on the profits had they been derived;

2. would have paid income tax on the profits in the same year they were derived;

3. was liable for income tax on the compensation it had received;

4. was liable for income tax on the compensation in the year it was received; and

5. was liable for income tax on the compensation and profits at the corporate tax rate of 30%.

84. Dr Ferrier opined that none of those situations describe the position of United, and that therefore the proper approach is to apply a pre-tax discount to the pre-tax loss of profits as assessed.

85. In Dr Ferrier’s opinion, if the Court considers that the compensation should be assessed on the basis of the value of either: the value of the goodwill attached to the Harwood Roadhouse considered separately from the rest of the United business; or the value of the goodwill lost by United as a consequence of the compulsory acquisition, it would be appropriate to use a pre-tax discount rate which assumes weak tenure. This is because, in relation to the Harwood Roadhouse, a hypothetical buyer would consider the insecure tenancy to be highly significant, and because, in relation to United as a whole, some of the United service stations had secure tenure.

86. It should be reiterated that Mr Giliberti considered that all of these calculations were inappropriate for the reasons given above at [60]. Additionally, Mr Giliberti said that he did not understand the premises upon which Dr Ferrier reached a figure for United Petroleum Trust’s goodwill assuming weak tenure as Dr Ferrier had not performed a fair market valuation of the value of goodwill in United as a whole.

Consideration

87. In view of the number of legal issues which have arisen in this case, and despite there being some overlap, I propose to deal with the claims for legal fees under s 59(1)(a), valuation fees under s 59(1)(b) and the rental claim under s 59(1)(f), before going on to deal with the other disturbance claims arising from the compulsory acquisition. I summarise the submissions of the parties under each point before my consideration.

Claim pursuant to s 59(1)(a) – legal costs reasonably incurred

United’s position

88. United claims it is entitled to be reimbursed legal costs pursuant to s 59(1)(a) in the sum of $13,206.50. It provides evidence comprising two tax invoices of its solicitors dated 31 January 2016 and 29 February 2016, and a memorandum of fees of counsel dated 23 March 2016. According to United’s written outline of opening submissions and the Points of Claim, the claimed amount represents “part” of the solicitors’ invoices ($11,719) and one-half of counsel’s memorandum of fees ($1,487.50) without any further particularisation. It submits that the costs claimed relate to advice taken by United in respect of the determination by the Valuer-General but prior to commencing proceedings.

89. In response to RMS’s position that these legal costs (and the valuation fees claimed pursuant to s 59(1)(b) considered below) are costs of the proceedings rather than “legal costs reasonably incurred by the persons entitled to compensation in connection with the compulsory acquisition of land” as required by s 59(1)(a), United makes three responses. First, the words “in connection with” have wide scope. Second, a claim for disturbance is an “equitable claim” the validity of which depends on the particular circumstances of each case, albeit the claim requires a causal connection to the acquisition that is not too remote. Third, United says RMS’s position presumes that the only fees that fall within s 59(1)(a) and (b) are those incurred up to the date of the valuer’s determination, which raises a temporal limit that neither s 59(1)(a) nor (1)(b) provides.

90. United further submits that such a temporal limit would deny landowners the ability to claim compensation for such matters as any ongoing negotiations regarding property adjustments or the payment of the advance payment pursuant to s 48 of the Just Terms Act.

91. Finally, United submits that it is common practice for the Valuer-General to allow a sum for future costs for a review of the Valuer-General’s determination and that this, in fact, occurred in this matter. The valuer’s report, in providing the “Determination of Compensation” in the sum of $139,319, included amounts for both “Legal Costs (not incurred but allowed post-determination)” and “Valuation Fees (not incurred but allowed post determination)”.

RMS’s position

92. RMS submits that the items representing work which are particularised in the invoices and memorandum of fees relate to costs of the proceedings and not costs in connection with acquisition. RMS says that s 59(1)(a) and (b) relate to circumstances where, for example, an acquisition involves a dispossessed owner in a number of early steps, including such matters as the receipt of initial correspondence from a resuming authority and a proposed acquisition notice, where an owner is invited to make a claim for compensation and such claim would then be provided to the Valuer-General. RMS submits that these are matters which relate to “interaction back and forwards between the Valuer-General in relation to a claim” and properly fall within s 59(1)(a) and (b).

93. However, RMS submits that, relevant to the present position, once a determination is made and legal (and possibly valuation) advice is then obtained in relation to a challenge to the determination (including preparation for challenging the determination), those are matters that are clearly costs of the proceedings. They are no longer costs in connection with compulsory acquisition because they are costs in relation to challenging the quantum that has been offered.

94. Whilst RMS accepts that the words “in connection with” are words of wide import, there “must be a line” and in this matter the Court should draw the line at a time before United obtained legal advice about appealing the quantum. Such costs, the RMS submits, relate to prospective proceedings to challenge the compensation offered.

Consideration

95. It is clear that the claim for costs relates to work that was undertaken mostly prior to the institution of proceedings on 22 February 2016. I accept United’s submission that there is no discrete temporal limit in the legislation and that the words “in connection with” are of wide scope as considered by Biscoe J in Caruana v Port Macquarie-Hastings Council [2007] NSWLEC 109; (2007) 210 LGERA 1 (‘Caruana’) at [44].

96. I note that the construction of s 59(1)(a) was considered in Hoy v Coffs Harbour City Council [2016] NSWCA 257; (2016) 281 LGERA 411 where the Court of Appeal considered whether the provision extended to legal costs incurred in establishing that a particular site was amenable to a compulsory acquisition claim. Bathurst CJ, with whom Simpson and Payne JJA agreed, said, at [59]-[60]:

The power to award legal costs, contained in s 59(1)(a), relates to costs incurred by a person entitled to compensation in connection with the compulsory acquisition of the land. A person is only entitled to compensation once the authority becomes bound to acquire the land, that is, in the case of a hardship application, once the preconditions in s 24(2) are established to the satisfaction of the relevant authority referred to in s 24(1). Legal costs incurred in establishing hardship are incurred prior to an entitlement to compensation arising and thus do not fall within s 59(1)(a).

Further, although, as the applicant pointed out, the words “in connection with” are of wide import (see for example, Claremont Petroleum NL v Cummings (1992) 110 ALR 239 at 279-280), it does not seem to me that in the present context, costs incurred in establishing an entitlement to have the land compulsorily acquired fall within the definition. Section 59(1)(a), in my opinion, is directed to compensating persons for legal costs incurred in respect of an acquisition, whether resulting from the application of the hardship provisions or the action of the acquiring authority. It does not confer an entitlement to compensation for costs which arise prior to that time.

97. Whilst I acknowledge that this analysis is not directly applicable to the present case where legal costs are claimed which arose after the entitlement to compensation, Bathurst CJ’s comments nevertheless emphasise that the crucial matter in the construction of s 59(1)(a) is the sufficiency of connection between the legal costs incurred and the “acquisition”.

98. In addition, I note the comment of Pain J in SNS Pty Ltd v Roads and Maritime Services [2018] NSWLEC 7 (‘SNS’) at [338]:

[There] is a clear statutory intent in s 59(1)(a) and (b) to limit fees payable to lawyers and registered valuers to advise a dispossessed owner in relation to an acquisition. This intent was made even clearer by the insertion of s 59(2) in 2016 to limit claimable valuation fees to those payable only to valuers with certain qualifications.

99. I accept her Honour’s analysis of the provision and, consistently with that statutory intent, consider that the ordinary language of the section should not be stretched to encompass legal costs that do not naturally relate to the process of the acquisition itself.

100. I therefore accept that there must be a causal connection between the costs claimed and the acquisition, that the connection must not be too remote and just as such costs may include pre-acquisition costs (although not, as seen above, costs that arise prior to an entitlement for compensation), there is no reason that they should not encompass costs incurred prior to the commencement of proceedings (Caruana at [44]).

101. Despite this, absent any other evidence, the tax invoices of United’s solicitors dated 31 January 2016 and 22 February 2016, which itemise work from 3 December 2015 to 26 February 2016, have a number of entries detailing attendances in relation to matters that I find relate specifically to the institution and conduct of proceedings including matters relating to the choice of, and engagement of, various experts, peer review of expert reports and preparation of brief to counsel. Further, the memorandum of fees of counsel dated 23 March 2016 specifically itemises work including “reviewing brief … conference … settling the Claim and Application”.

102. My view is that, having received an offer for compensation, a dispossessed owner is entitled to seek legal or valuation advice to assist in determining whether or not an appeal should be commenced, particularly where, as is the case here, questions of nicety arise in relation to the present claims and there is no suggestion that the costs and fees were not reasonably incurred. Whilst I accept United’s submission that it would be “hard to see” how such advice could be regarded as anything other than obtaining advice and assistance “in connection with” the compulsory acquisition of the Land, the limited evidence leads me to the view that the preponderance of the solicitors’ and counsel’s itemised work in this instance related to the institution of proceedings and associated preparation.

103. There is, of course, a point in time when costs change from being within s 59(1)(a) and (b) to being a cost of the proceedings and there would be situations where such costs and fees were not “reasonably” incurred in the sense considered by Tobias JA in Roads and Traffic Authority of NSW v McDonald [2010] NSWCA 236; (2010) 175 LGERA 276 (‘McDonald’) at [143]. However, there is no bright line. Whilst each matter will depend upon the particular circumstances, on the present evidence I find that the subject legal costs, although the claim is simply said to be “part” of the solicitors’ invoices and “50%” of counsel’s fees, without further articulation, relate primarily to the commencement and conduct of proceedings and, as such, do not fall within s 59(1)(a).

Claim pursuant to s 59(1)(b) – valuation fees reasonably incurred

United’s position

104. United claims valuation fees in the sum of $14,861.21. It provides evidence of a tax invoice received from Value Advisor Associates, with an attached time sheet itemising work undertaken between 18 January 2016 and 19 February 2016 by various people including Mr Giliberti who gave expert evidence in these proceedings and referring, among other things, to a meeting with counsel on 22 February 2016. United submits that the costs relate to advice it took in respect of the determination by the Valuer-General but prior to commencing proceedings. United repeats its submissions made in relation to legal costs summarised at [89] above. In particular, it repeats that the words “in connection with” have wide scope, that a claim for disturbance is an equitable claim, the validity of which depends upon the particular circumstances of each case, and that the claim for valuation fees pursuant to s 59(1)(b) is not confined to the period before the Valuer-General’s determination.

RMS’s position

105. RMS makes similar submissions as those made in relation to legal costs and says that the fees of Value Advisor Associates relate to work done for these proceedings and so forms part of the costs of proceedings which are not compensable under s 59(1)(b).

Consideration

106. In addition to Pain J’s comment in SNS quoted above, Moore J made the following comment in relation to s 59(1)(b) in Constantine v Blacktown City Council (No 2) [2016] NSWLEC 81 at [148]:

The provision [s 59(1)(b)] makes it clear that claims under this heading are for the costs of utilising the services of a valuer as part of the acquisition process (including, it is to be noted, the negotiation process prior to formalisation of the acquisition). Indeed, to ensure that claims made pursuant to this subsection are precisely confined, those who can be regarded as “valuers” for the purposes of s 59(b) are set out in s 59(2), with only those persons satisfying one of the bases there listed being able to provide a foundation for a claim for reimbursement for the engagement of a qualified valuer.

107. I again accept there is a legislative intent to minimise costs payable under s 59(1)(b).

108. The work itemised in the tax invoice of Value Advisor Associates specifically refers to work undertaken involving Mr Giliberti and others on a number of occasions and includes work on the preparation of draft reports, attendance upon counsel in chambers and with solicitors on 15 February 2016. These matters should be seen in light of the fact that the proposed acquisition notice was issued by RMS on 30 October 2014, the Land was compulsorily acquired on 28 August 2015 and that the determination of compensation was completed by the Valuer-General on 19 November 2015. The time sheet attached to the tax invoice of 22 February 2016 relates to work predominantly in February 2016 in circumstances where proceedings were commenced on 22 February 2016.

280. Contrary to RMS’s submissions, I do not accept that the fact that the present case does not deal with an “ascertainable sum” or an “ascertainable period” gives rise to any doctrinal difference which would distinguish HAC.

281. It should also be noted that the reasoning in HAC was the subject of some commentary on the part of Basten JA in Allandale. With respect to whether Aerated Water applied to the situation of post-acquisition disturbance losses, his Honour said at [30]-[31]:

The first point of distinction, namely that between a periodic tenancy which had not expired and one that had, has no bearing on the principle relating to the value of the interest in land. The second, (“no reason to assume” future conduct) does not reflect the reasoning in Aerated Water set out at [25]-[26] above. The third ground of distinction, namely that Aerated Water was concerned with “the market value of the interest as opposed to post-acquisition disturbance losses” was not applicable to a claim under s 55(f) (rather than s 55(d)), but is also unpersuasive. First, it assumed the conclusion that such losses can only be dealt with as “post-acquisition disturbance” and, secondly, it assumed that the legislative changes created by the identification of separate heads of loss have not merely significantly expanded the bases of recovery (potentially permitting two parties to recover the same loss) but have also rendered the subjective intentions of the parties relevant.

It is accepted that a claim can be made for loss of profits by a business where it has an interest in the acquired land, even if that interest has no compensable value. What is puzzling is why, under the Just Terms Act, the business is valued as if it had a secure tenancy, whereas its legal interest was entirely insecure. That requires reference to a curious approach adopted with respect to the operation of s 55 and its defining provisions.

283. His Honour went on to say at [40]-[42]:

The primary judge relied upon George D Angus as support for the view that although the interest held by QPN, as a tenant at will, “had no relevant market value”, it was, nevertheless, entitled to make a claim for compensation “limited to losses attributable to disturbance.” [32] However, if the tenancy was, as a matter of law, terminable on one month’s notice, it could not become a lease for an indefinite period because of the intentions of the parties, without departure from Aerated Water. If it was not a right of exclusive possession for an indefinite period, but only for one month, it is difficult to understand how it could justify a substantial sum for disturbance.

George D Angus became relevant in these proceedings only indirectly. As RMS explained, it had relied upon George D Angus before the primary judge as the first step in its double dipping claim. In its submission, a disturbance claim could only arise from “actual use” of the land which, in accordance with George D Angus, was a claim properly made by QPN as a tenant in exclusive possession, reflecting the subjective intentions of the parties. If it had such a continuing interest, that interest was exclusive of ABM and should have precluded the latter’s claim.

It is difficult to see how the result in the present case can stand with the reasoning in George D Angus. It is difficult to avoid the conclusion that it is anomalous to assess compensation to the owner on the basis that the tenancy may be terminated immediately, for the purpose of the hypothetical sale, but to assess compensation to the tenant on the basis that the current use of the land will continue indefinitely.

284. These comments are not without some force. However, I do not consider that they are capable of displacing the decision of this Court in George D Angus and the decision of the Court of Appeal in HAC, particularly when regard is had to the striking factual similarities with the present matter. This is especially so given that in Allandale, Sackville AJA reached the same conclusion as Basten JA (with whom Ward JA agreed) in relation to the determination of Allandale’s compensation claim via a different line of reasoning, commenting at [101]-[103]:

In reaching this conclusion, I do not think it is necessary to form a view as to the correctness of the decision of this Court in [HAC]. That case involved a claim by a tenant for a large amount of compensation as disturbance under ss 55(d) and 59(f) of the Just Terms Act. The tenant succeeded notwithstanding that his lease was terminable on a month’s notice.

The Court in [HAC] distinguished Aerated Water on a number of grounds. One distinction was that Aerated Water was concerned with assessing the market value of acquired land while [HAC] involved a claim for “costs reasonably incurred … relating to the actual use of the land, as a direct and natural consequence of the acquisition”.

In my view, [HAC] concerned issues different from those presented by a compensation claim under s 55(f) of the Just Terms Act such as the claim made by ABM. I do not think that there is any inconsistency between the reasoning in [HAC] and the conclusion I have reached in the present case (citations omitted).

285. In view of the above, I find that the correct approach, indeed the approach which I am bound to take, is that articulated by this Court in George D Angus and upheld by the Court of Appeal in HAC.

286. It was submitted by RMS that because disturbance can only be claimed for the “actual use of land” and the actual use of the Land was as an insecure tenancy, United should be precluded from recovering damages calculated in perpetuity for that reason. The problem with that submission is that it defines “actual use” of the Land too narrowly.

287. In assessing disturbance, the clear effect of the authority binding on this Court is that the “actual use” of land is not confined to a narrow analysis of legal instruments. In accordance with Preston J’s analysis in George D Angus, the Court, in assessing a disturbance claim, must decide whether the party has a relevant interest in the land, but where it is a leasehold interest, the strength of the tenancy is irrelevant.

288. Therefore, it is not appropriate to take into account the fact that United had only a weak tenancy in the calculation for loss of profits. As such, I do not factor in a discount for weak tenancy as part of the maintainable capitalised earnings calculation.

289. I should add that if it had it been necessary to address the question, I do not think that United’s case is assisted by the High Court’s decision in Marshall. Whilst I accept that statutes should be read purposively, I do not understand Marshall to be advocating a departure from the ordinary principles of statutory construction which dictate that the Court must have regard, in the first instance, to the clear meaning of the text. That principle does not bear upon the applicability or otherwise of Aerated Water.

Profit not lost

290. As noted above, Dr Ferrier makes an adjustment to the average annual contribution profit generated at the Harwood Roadhouse based upon what he called “profit not lost”, in effect being the assumption that upon cessation of the United Roadhouse business, not all sales would have been lost to United because some customers would make purchases at other United service stations.

291. Dr Ferrier relied particularly upon commercial customers who hold a “commercial fuel card” (or loyalty card) and who travel the Pacific Highway between Grafton and Lismore. He considered evidence from United’s material that approximately 110 separate account holders used loyalty cards at Harwood Roadhouse and that a certain number of accounts had either been closed or became inactive since the closure of the Harwood Roadhouse. Whilst unable to provide precise details of the background material he relied upon, he noted that 64% of cards that were “active” at Harwood Roadhouse remain active at other United sites. He assumed that 80% of the Harwood Roadhouse sales were made to local business.

292. From the remaining 20% of sales, Dr Ferrier said that some brand loyalty to United could be expected and that consequently not all of the profit from those sales would be lost. He used United’s loyalty card program as a “proxy” for brand loyalty, and concluded that 64% of the non-local sales (that is, 64% of 20%) of United’s customer base could reasonably be expected to be maintained. Therefore, he concluded that the average annual contribution profit generated by Harwood Roadhouse should be adjusted down in the sum of $68,000. Mr Giliberti did not agree with this figure as there were competing, that is, non-United, petrol stations located in the Harwood area.

293. United submitted that Dr Ferrier’s evidence was unsatisfactory particularly his consideration that United would retain 20% of its customers at other United service stations post acquisition. United further submitted that Dr Ferrier produced no credible basis or reasoning to justify this adjustment.

294. RMS submitted that it is unrealistic to suggest that every litre of fuel previously sold at Harwood is now sold at a non-United service station and Dr Ferrier was able to make his assumption from the evidence available.

295. I accept that the precise material relied upon by Dr Ferrier is a little unclear. However, I note that his conclusion was not, as United submitted, that 20% of the customers would be retained, but rather 12.8%. In addition to the material Dr Ferrier considered, including the loyalty card material, I note that there is evidence before the Court (called on behalf of United through Mr Carmeli and Ms Spry) that United operated a network of service stations, many strategically located along major roadways, a number of which are not significantly distant from Harwood, including 30 service stations within 200kms from Harwood, and 8 service stations within 100kms. Given the evidence, I accept that not all customers would be lost.

296. Doing the best I can, I consider given the nature and extent of the relatively local network, I consider it appropriate to adopt 50% of Dr Ferrier’s suggested adjustment, being an adjustment of 6.4%. This means, in effect, that 64 in 1000 customers would continue to use United service stations, and reflects a sum of $34,000. The annual contribution profit should be adjusted accordingly.

Tax adjustment

297. With respect to tax, the differences between Mr Giliberti and Dr Ferrier canvassed can be ultimately expressed as whether a 17% discount rate or a 24% discount rate should be applied to the projected annual earnings, that is, the $497,000 figure.

298. The 17% discount rate was calculated having regard to publicly listed companies. As Mr Astill observed in oral submissions, publicly listed companies report on a post-tax rather than pre-tax basis. In Appendix B to the joint report, Mr Giliberti explained that Dr Ferrier’s 24% rate was reached by dividing the 17% post-tax discount rate by 1/30%. Mr Giliberti opined that this method of calculating the pre-tax discount rate was conceptually flawed because the cost of equity reflects a return on equity based on different effective tax rates for different companies.

299. Dr Ferrier’s position is that $497,000 represents the income stream pre-tax, so that a pre-tax discount rate should be applied. He noted that this approach is consistent with the accountancy standard (see [81] above).

300. In cross-examining Dr Ferrier, Mr Hemmings posited that because the United Petroleum Trust is not a tax-paying entity, its post-tax revenue would remain at $497,000 and so this figure was equally amenable to the 17% discount rate. Despite putting this proposition to Dr Ferrier several times, Dr Ferrier did not demur from his view that the pre-tax earnings should be calculated by reference to the pre-tax discount rate.

301. In final submissions, Mr Hemmings expressed what he called Dr Ferrier’s error by way of the following example:

1. United receives $497,000 in profits. It distributes all of those profits to its beneficiaries who pay tax at their respective tax rates. United itself pays no tax.

2. United receives $497,000 in profits. Dr Ferrier adjusts for the 30% corporate tax rate. United now has $347,900 to distribute to its beneficiaries, who again pay tax at their respective tax rates.

302. United submits that Dr Ferrier agreed that in order to ensure compliance with the accountancy standard, an adjustment can be made to either the capitalisation rate or to the earnings. Dr Ferrier chose to adopt an approach which is to increase the capitalisation rate, while he could have chosen to use the post-tax earnings, which would be $497,000 because United does not pay tax. Dr Ferrier posited in his individual expert report that United does not pay tax. In United’s submission, the correct understanding is therefore that the post-tax capitalisation rate of 17% should be applied to the post-tax earnings of $497,000.

303. RMS submits in response that the Court ought not to be concerned with tax liability in assessing compensation. The loss lies where it falls. The cash flow, it submits, is assessed as pre-tax and so too should be the discount rate. Mr Astill submitted that an adjustment in earnings was never put to Dr Ferrier, because that would have required the pre-tax earnings of the publicly listed companies upon which the 17% discount rate was based to be calculated and presented to him.

304. I find that the difficulty in the situation is accurately described by Mr Astill as how to reconcile the 17% discount rate which was determined having regard to post-tax reporting, to the pre-tax earnings of United.

305. Assuming that the accountancy standard is to be applied, either a pre-tax discount must be applied to pre-tax earnings or a post-tax discount must be applied to post-tax earnings.

306. I consider that, in the present case, this is capable of being resolved in a number of ways. First, the post-tax rate can be converted to a pre-tax rate. This is what Dr Ferrier has done. However, this approach is contentious in the sense pointed to by Mr Giliberti, in that it assumes a tax rate of 30% when, in fact, the effective tax rates of the companies used to determine the rate varies. Further, it is inappropriate to assume a tax rate of 30% when it is not disputed that United did not pay that rate of tax as a matter of fact.

307. Secondly, the 17% discount rate could have been adjusted by reference to the pre-tax earnings of the listed companies assessed. This was the suggestion made by Mr Astill. The evidence was that this would have been a particularly labour-intensive process and the fact is that it was not done. What difference it would have made to the 17% rate is purely speculative.

308. Lastly, the post-tax discount rate could be assessed having regard to United’s post-tax profit. It is agreed by all the experts that United did not pay tax, but rather paid its beneficiaries who then paid tax at their respective tax rates. It follows, then, that the post-tax profit was $497,000 and that this figure is amenable to adjustment by reference to the 17% discount rate.

309. I note that Dr Ferrier in cross-examination found this to be an inappropriate approach. With respect to him, I do not find that he articulated any compelling reason why this is so. Indeed, it is the only approach which can be taken where none of the amounts used to reach the result are in dispute.

310. Therefore I find that the 17% post-tax discount rate should be applied to United’s post-tax earnings, which are $497,000.

Market rent adjustment

311. RMS initially contended that evidence as to whether the lease would have been formalised was irrelevant. In the course of cross-examining Mr Carmeli, Mr Astill put it to him that it could not be said that but for the acquisition United would have had a formalised lease at the Harwood Roadhouse site in the circumstance that no formalised leases for any United operations had been finalised by August 2015. Mr Carmeli maintained that it was possible, but agreed that no formalised leases existed between United and its various landholding entities at the acquisition date.

312. In those circumstances, I find that it would be unreasonable for the Court to infer that market rent should be deducted from United’s earnings at the acquisition date as the available evidence shows that such an eventuality would have been highly unlikely.

313. For the purposes of capitalising earnings, Dr Ferrier adopted market rent from the date of vacant possession.

314. This approach sits somewhat uncomfortably with RMS’s primary submission on the applicability of Aerated Water because it takes into account the subjective intentions of the parties to enter a formalised lease for the purpose of capitalising their earnings. However, as I have outlined above, I consider that the Court is bound by HAC with the consequence that the subjective intentions of the parties can be relevant to a disturbance claim. Given that finding, it is appropriate that United’s earnings be adjusted to account for the date after which it would have been paying market rent.

315. In his closing submissions, Mr Hemmings said that United had made the “conservative assumption” that the lease would have been finalised within 12 months of the acquisition date. He submitted that the period from the acquisition date can therefore be split into three periods: the period covered by the ‘rental claim’, where United occupied the property after the acquisition date paying market rent to RMS; the period from the date of vacant possession to 15 August 2016, where United would not have been paying market rent; and lastly the period from 15 August 2016 onwards, when the lease would have been formalised and United would have been paying market rent to Lastep and Elmon.

316. In his closing submissions, Mr Astill (at Tcpt, 2 June 2017, p 247(45) onwards) said:

To the extent that market rent would be an adjustment, it would have to be based on the assumption that a formal lease would be in place. My friend, I think, suggests that would be about a year after the date of acquisition. I think I can’t disagree with that. But for the acquisition, the evidence seems to be that a year later or thereabouts a formal lease would have been entered into, and the evidence of Mr Carmeli was, or confirmed I think, that when that happened the lease would go to market.

317. Inevitably there is some degree of prognostication involved in determining when the formalisation of the lease would have occurred given that the compulsory acquisition meant that it never proceeded. I therefore consider that it is appropriate that I give effect to this agreement between the parties and determine the loss of profits on the basis that the lease would have been formalised on 15 August 2016. The capitalisation methodology must therefore take into account that United would have been paying market rent for the Harwood Roadhouse from that date.

6. Are the assets compensable?

318. I now consider the question of whether United, as opposed to Lastep and Elmon, owned any of the assets on the site, and, if so, whether the asset registers are an appropriate source upon which to rely in recompensing any loss of assets.

319. I note in this regard that the contribution of the assets in the extinguishment scenario is different from that considered in the relocation scenarios. The contribution of the assets to the profitability of United’s Harwood Roadhouse operations is factored into the assessment of United’s capitalised maintainable earnings.

320. The question that remains therefore is whether there were any assets left on the site for which United should recover compensation as disturbance. For the following reasons, I find that there were no such assets on the site.

321. It was the evidence of Mr Carmeli that some assets were taken from the site, others were left because it was considered that they had no value elsewhere, and some were left because there was insufficient time to move them before the date of vacant possession.

318. I accept the opinion of Dr Ferrier that any assets which were removed from the site cannot be recovered by United because they have not been lost.

319. Further, assets which were not considered to have any use elsewhere cannot be recovered in the circumstances that the Harwood Roadhouse business will not be relocated. The extent to which it would have been necessary to replicate the set-up of that site elsewhere in the context of a relocation scenario is not a question to which the Court need turn its attention in the circumstances. The contribution of the assets to the profit generated in the site is recovered, as I have said, in the capitalisation of those profits.

320. The third class of assets to which Mr Carmeli referred, that is, assets which were left on the site because there was no time to remove them, is not a class for which I consider the Court should award compensation. There were several months between the acquisition date and the date of vacant possession. To the extent that it was not practical to remove assets in that period, I think it is reasonable to conclude on the balance of probabilities that these assets were unable to be removed such that they should be considered fixtures to the Land rather than fittings, or else were abandoned.

321. In the circumstances, it is therefore unnecessary for me to consider the question of the ownership of the assets. However, the asset registers would not necessarily have persuaded me that United was the owner of the assets having regard to the fact that reference was made to their use as an accounting exercise.

322. It is not necessary for me to consider Mr Hemmings’ submission that the Court would prefer an understanding that assumes a state of affairs in which there has been no illegality. I accept that proposition as a general statement of principle, but do not find it necessary to express a view as to its applicability here.

Conclusion

327. For the foregoing reasons, I make the following findings and direct the parties to calculate the quantum accordingly. I find that the amount of compensation to which United is entitled should be determined having regard to the financial costs reasonably incurred as a natural consequence of the acquisition pursuant to s 59(f). The lost profits from the date of vacant possession should be calculated by way of a CME calculation. The variables for the CME calculation will be:

1. An annual post-tax earnings figure of $463,000 ($497,000 minus $34,000 profits not lost), to be adjusted after 15 August 2016 to allow for market rent which would have been paid after that date; and

2. A post-tax discount rate of 17%.

328. Upon receipt of the parties’ calculations, the Court will make final orders.

329. United is additionally entitled to the sum of $82,956 for the rental claim pursuant to s 59(f).

330. In the circumstances, I consider it appropriate that the usual order be made as to costs.

Directions

331. The parties are directed to:

1. Calculate a quantum of compensation for the extinguishment of maintainable earnings from the Harwood Roadhouse in accordance with my findings and prepare short minutes of order which include the agreed calculations, including any interest.

2. Include in the short minutes of order the sum of $82,956 for rent paid to the respondent during the period from the date of acquisition to the date of vacant possession.

3. Include in the short minutes of order an order that the respondent pay the applicant’s costs as agreed or assessed.

4. Provide the agreed short minutes of order to my Associate by 4pm Wednesday 4 April 2018.

5. The matter is listed for further mention at 9:30am Monday 9 April 2018.

6. If directions (1)-(3) are complied with, the mention will be vacated and final orders made in chambers in accordance with the agreed short minutes of order.

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Decision last updated: 28 March 2018